On the go: Almost a quarter of FTSE 350 defined benefit schemes with rated sponsors expect corporate insolvency before they reach buyout, according to analysis from Hymans Robertson.
In its annual FTSE 350 DB Report, published on Wednesday, the pensions consultancy cautions that 22 per cent of schemes can expect sponsor insolvency to trigger early wind-up, forcing annuitisation and a potential haircut to members’ benefits, and advises pension funds to put measures in place to mitigate this risk.
The research showed that when corporate default probabilities of less than 50 per cent are considered, the position becomes even more stark. Almost half of schemes (43 per cent) with rated sponsors have a 33 per cent chance of corporate default before they reach buyout.
According to Alistair Russell-Smith, head of corporate DB at Hymans Robertson, DB schemes with a significant risk of corporate default ahead of reaching buyout should be looking at all options.
“Newly emerging solutions such as capital-backed solutions and superfunds can protect against this risk by providing a financial covenant to fall back on in the event of sponsor insolvency,” he said.
While the report relates to data from 2019, Hymans Robertson undertook additional research to put the findings in the context of the coronavirus backdrop.
It looked at the rated schemes in the FTSE 350 — 93 pension funds — and found that most of them are well positioned to absorb Covid-19 stresses.
Nearly three-quarters of these schemes (71 per cent) have both an investment-grade sponsor and a DB recovery plan of less than seven years.
However, one in 10 (9 per cent) have a sub-investment-grade sponsor and a DB recovery plan of seven years or longer, which puts them at risk. They will have little capacity to absorb Covid-19 stresses and will ultimately struggle, Hymans Robertson warned.
